I co-founded early stage venture firm Village Global about seven and a half years ago.
It’s been a hell of a ride. We’ve backed more than 300 startups and manage over $500 million of capital.
We’ve institutionalized our unique network strategy into a kind of smart power grid that supercharges entrepreneurs who start companies and investors who start new VC firms.
I’ve spent about 30,000 hours on the Village journey so far — the longest I’ve ever done anything in my career so far.
It’s still early days, we have a long way to go (venture is a long game!), and a lot more cash we intend to distribute to our LPs. Nonetheless, it felt like a good time to take stock of the last seven years and look towards the next seven: To codify some of my lessons learned so far, share some observations on what’s happening in the venture industry, and put forth questions I’m noodling on.
In this post I’ll break out the grab bag of observations – it’s a motley mix – into roughly three categories:
- General observations and lessons about what’s happening in early stage VC right now
- The art and science of investing
- Firm structure, strategy, and portfolio construction
If you’re a GP or LP in the ecosystem, I’d love your feedback on any of these points.
General observations and lessons on the venture market
Top founders seek wisdom from fellow builders, not lectures from VCs
GP talent is deplatforming; the next generation is leaving big firms
There are two possible moats for venture firms: brand and/or network
Brand moats and firm success lead to later stage investing and larger funds
How big will venture outcomes be in the future?
The art and science of early stage investing
Experts understand simple things deeply
Forming conviction and talking about conviction on an investment team
Are hot financing rounds at seed predictive of long term company success?
Do serial founders deliver better returns than first time founders?
VCs lack rigor when analyzing founder quality despite its central role in early stage investing
“Hell yes” conviction versus “I guess so” conviction
What does it mean to leverage a network to make better investment decisions?
Venture Firm Structures, Strategies, and Portfolio Construction
If you just want to invest, don’t start your own firm
Portfolio construction is key but beware of theology: There are many ways to make money
Investment rules might seem arbitrary—but they prevent decision fatigue from frying your brain
Entry price matters. And entry price doesn’t matter. The never ending debate
There are only two ways to do deals at attractive prices with no adverse selection
Breakout, smashing success at the beginning can cause venture franchises to over-scale
How much to support struggling companies versus your winners?
Why are venture firms generally so poorly run? How do partnerships/committees work?
General observations and lessons on the venture market
Top founders seek wisdom from fellow builders, not lectures from VCs
Founders have no time for lectures from VCs who draw upon entrepreneurial experience from 10+ years ago.
Advice ages fast, especially in the AI era. The startup playbook is being re-written. To be an AI-native company means employing new strategies around hiring, marketing, coding, sales, and more.
Our founders tell us the most helpful people to learn from are fellow operators building at the same stage or one stage ahead.
The problem? Most venture firms are set up to add value in exactly the opposite way. Traditional firms are top heavy with expensive GPs who sit on boards and pontificate and give direct advice.
What they should be doing is savvily facilitating the latest knowledge between and among founder peers. But firms spend all their money on GP salaries, not on founder community.
At Village, we aim to be the grid—the energy mesh across multiple startup communities—so that founders can “plug in” to high-voltage expertise not just from us, but from each other.
It’s also why we love partnering with operator-angels and operator-GPs. Active operators add so much more value than the typical full time VC.
There are two possible moats for venture firms: brand and network
A firm’s reputation—conveyed in its brand—serves as a moat. Firms like Accel leverage their reputation to win deals—a self-reinforcing flywheel that spins faster with each new deal won. The stronger your brand, the stronger your brand gets over time with new wins.
A true network moat is rarer and more subtle. Every GP talks about their network, so it can seem commonplace. A GP who has a large collection of friends who sends him deals? Sure, that’s common. That’s not a firm-level moat.
Firms with a network moat have mastered the weave of relationships that drive deal flow and founder NPS. Some of the component parts include:
- Crossover roles for people in the network — i.e. the same person can relate to the firm in different ways
- Reciprocity loops between and among founders and other key network participants
- Economic and social incentives that allow you to predict (and shape) future behavior of the participants
- The sheer number of relationships in the network — scale matters
- Newness/hotness/freshness of the network and the expertise of the people in it on key tech trends
Great network firms build electrical grids, not just power plants—energy moves everywhere, not just from the top down. Less command-and-control, more serendipity in how deals get done.
In the end, firms with proprietary network strategies benefit from a rich-get-richer effect, where they can see and win more deals than their competitors due to the sourcing + winning power of their vast human network.
Success –> Brand Moat –> Larger Fund –> Later Stage Access Investing
Here’s what happens to many successful firms:
- They begin to develop a brand of excellence.
- With that brand, they can access hotter deals, which tend to be larger rounds at higher valuations.
- Simultaneously, with the passage of time, the GPs get busy because they’re managing an existing portfolio of board seats. It becomes more efficient to write larger checks in a fewer number of later stage deals.
- LPs like the (lagging indicator) performance and the brand. LP interest pushes the fund sizes larger.
In short: Success leads to larger fund sizes, which incentivizes later stage, larger check investing. Success leads to raising multiple fund vintages, which leads to GP busyness, which makes it more logical to do fewer, later stage deals.
Put it all together, and it’s no wonder successful firms tend to move away from seed stage. You relax into a brand moat. You let the network moat atrophy — the thing that enables discovery, the thing that’s incredibly hard to keep cutting edge. Access wins over discovery.
How big will venture outcomes be in the future?
Software is eating the world. Tech is growing. Yes. That much is clear.
But what will be the shape of venture exits in the next decade—will there be more mega-exits (decacorns), a flood of smaller outcomes, or both? Smart people disagree.
One of the most important perspectives a GP can take on the market right now relates to the quantity of exits and likely terminal value of those exits.
Mega-exit optimists say the market pie is bigger than ever, and AI is rocket fuel. Software isn’t just eating the world—it’s devouring entire galaxies. But regulatory friction in M&A means small exits dry up, and the big tech incumbents will wipe out small SaaS companies and gobble up consumer efforts before they get lift off. They say: It’s go big or bust—think Stripe, Anduril, SpaceX.
A different flavor of optimists foresee fewer new giants, but a vast landscape of modest wins. They’ll say there are bigger markets, yes, due to the rise of tech everywhere. But these will be markets flooded with more VC capital, more competitive intensity, and weaker moats due to AI. Instead of towering decacorns, picture a sprawling suburb of single-digit unicorns.
Why does this debate matter for early stage venture? VC returns depend on exit price and entry price. If you think exits will be even more enormous in the future, you can be less sensitive to entry price. Whereas if $1 billion exits are more the norm, entry discipline matters.
My take is that it’s hard (impossible?) to know which macro environment is more likely. Early stage investors (unlike growth equity investors) don’t actually need to predict the future perfectly in this respect. If you can build a deal sourcing system that finds you founders early, which means you can pay reasonable entry prices, you’ll enjoy fund returning multiples either way—whether the future is single-digit unicorns or towering decacorns.
Social media is full of spin—from the outside, you don’t actually know how a company or venture firm is doing
Founder sells his company, makes the obligatory LinkedIn Oscars speech—50 shoutouts to early believers, mentors, baristas. Hundreds comment “Congrats!” But peek behind the curtain: it’s often just an acqui-hire or a polite funeral disguised as a party.
Strangely, sometimes I witness an inverse correlation with the success of a company and the amount of self-congratulation that happens in the post-transaction announcement.
Ditto at venture firms. The noisiest firms are not always—often?—the most successful ones. And the firms making the loudest claims about their harmony are sometimes quietly imploding. I’m familiar with dysfunctional GPs who publish serene blog posts on ‘conscious uncoupling’ with one hand, while knifing each other behind closed doors with the other.
From the outside, it’s just extremely hard to know what’s actually happening inside a firm or a company. Don’t believe everything you read.
LPs usually follow lagging indicators, not leading indicators, which explains why GPs who got lucky 7 years ago still raise monster funds today
Ever wonder how a firm that’s definitely not cool anymore, not on the inside track with founders, with GPs who are completely under water managing their historical portfolio, still manage to raise ginormous new funds?
LPs generally follow lagging indicators, not leading indicators. LPs often invest looking backward through the rearview mirror, mistaking history for destiny. So, if you’re lucky or good in your Fund 1 and it’s a smashing success, you can raise many funds for many years based on that—even if your edge has long since dulled.
Leading indicators for venture firms are softer but smarter:
- Quantity and quality of deal referrals from portfolio founders
- Graduation rate to the next stage (e.g. seed to Series A) and the quality of those follow-on investors
- Compounding network strength and/or compounding brand strength that answers whether the deals being done today are pulling from the most compelling talent networks of today
- Founder satisfaction
- Compounding talent strength (i.e. hired employees and GPs) inside the firm
GP talent is deplatforming; the next generation is leaving big firms
A generational transition is happening at a pace we’ve never seen before. Ethan Kurzweil. Tomaz Tunguz. Kristina Shen. Sarah Guo. Many others are leaving their big firm employers and starting their own funds or joining smaller outfits.
You can understand why this is happening: When you’re helping create billions of returns but not seeing millions hit your pocketbook, you eventually bolt. The democratization of fund formation and fund administration is a factor (thank you, Carta and AngelList). As is the rise of a media environment that centers individual personalities over corporate brands or firms.
I believe founders will follow their favorite (human) investors as they leave and start new firms. And this means the leaderboard of go-to firms will shake up in the coming years.
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Small emerging manager funds produce the best raw performance—but they’re hard to find and select amidst the thousands of tiny funds
LPs feel stuck.
Some VC firms have become asset management malls—big, crowded, predictable, and low-yielding. They vacuum up LP cash without delivering true venture-sized returns.
On the other side of the continuum, there are specialist emerging managers who outperform their larger, older competitors, the data suggest. But selecting these managers is a needle-in-the-haystack exercise.
There are thousands to pick from, and most of the GPs lack track records that are easily understood and underwritable. (What you actually have to do is assess angel investing track records – which few traditional LPs do, and it’s something we’ve become expert in at Village.)
So the hunt is on for lean firms that can 3-5x their funds.
The next great money making opportunity for venture LPs is finding — amidst all the noise — rationally sized funds, operated by new or new-ish managers, who sit at the frontier of their respective fields, who can then find the next generation of founders.
The art and science of early stage investing
Experts understand simple things deeply
In recent years, we’ve been fortunate to bring tech’s brightest lights into the Village—Satya Nadella, Jensen Huang, Sam Altman, Michael Dell, Andy Jassy, and our own Chairman Reid Hoffman—to illuminate key ideas for founders.
At these gatherings, I’m always struck that the questions of interest for the biggest titans in tech are the same topics our seed-stage entrepreneurs raise: How do I recruit an amazing team? How do I stay close to customers and understand their true needs? How can I become even more productive and organized day-to-day?
World-class CEOs become legendary not by chasing complexity, but by exploring simplicity with relentless depth.
Similarly, in the world of investing, legendary private market investors contemplate similar questions as the newbie GP: How do I hone my sourcing edge? How do I reference check and deeply understand the quality of the CEO? How do I ensure I’m not experiencing adverse selection in seeing this deal? What problem is this company solving for its customers? How large is the market and how might it grow?
As great investors become more seasoned, they don’t graduate into complexity; they master simplicity. Their edge comes from exceptional judgment on timeless—often obvious—questions.
The lesson: If you’re a beginner at anything—including investing—don’t shy away from asking the “obvious” questions. And keep asking those questions as you mature.
Forming conviction and talking about conviction on an investment team
For investors, conviction—the depth of your belief in an investment opportunity—is the most important compass.
And talking about your conviction with your colleagues is something that happens on every investment team. But it’s a minefield.
Each person on an investment team might form and communicate conviction differently. And stylistic differences can inadvertently distort investment decisions. Fundamental analysis gets diluted with interpersonal misinterpretations.
People’s Default Tendencies and Personality Traits
Personality and cognitive styles loom large when it comes to conviction.
Some people are simply more convicted people in general. They’re decisive. They love something—or they hate something. The sushi’s sublime or revolting. Tesla’s Roadster is the future or a flashy dud.
Hell yes, or hell no. They’re gung-ho personalities, decisive, brimming with natural confidence. At their best, it’s not that these conviction-by-default people are incapable of subtle thinking. It’s more that their brains tend to work down or up from either a high or low starting point.
For example, I know investors of this breed who, upon encountering a credible opportunity, tend to start with 9 out of 10 conviction after one pitch. They default to, “What could go right?” They default to enthusiasm. As they undergo diligence, their enthusiasm sometimes lessens, and their conviction gets chipped away. If and when the investment gets done, their conviction morphed from 9 out of 10 to 7 out of 10 – lower but still above the bar.
There’s also the inverse. There are investors who start at “no” and default to skepticism. For whatever reason, they’re more jaded by nature. More cautious. They’ve seen too many failures. As they spend time with the founder, they warm up, and conviction creeps up from 4 out of 10 to 7 out of 10—and the investment gets done.
Still other types of people are equivocal by nature and tend to default to “both sides have good points”—they see the possible merits and demerits of every investment and have a measured way of forming and expressing opinions. These more deliberate people are constitutionally incapable of loving or hating anything—they start at 5/10 for everything.
All of these types of investors—the gung-ho, the skeptics, the aggressively even keeled—can arrive at 7 out of 10 conviction (or higher)—or whatever level necessary to pull the trigger on the actual investment.
Each person ended up in the same place. So I’d argue the difference in each person’s starting “conviction default” didn’t matter presuming it took each person the same amount of time to arrive at the right answer.
Talking about Conviction Casually Can Change Underlying Conviction in Unhelpful Ways
Investors gauge how much their partners believe in a particular opportunity by asking, “How much conviction do you have in this opportunity versus the others we’re looking at?”
In a team context where you talk about deals before a decision’s been made, these differences in personality and style, as it relates to conviction, introduce impurities.
If you ask someone whose default posture is skeptical to provide an update on his in-progress thinking on a given idea, he might come off to the group as lukewarm. He’s still forming his views. His on-the-one-hand, on-the-other-hand narrative might undersell his potential to garner great enthusiasm.
With such a fragile presentation, the rest of the group might pile on to reinforce the skepticism.
And just like that, you’ve killed the deal.
These dynamics make it vital to know the tendencies of each colleague on the team, how they tend to default, and what “high conviction” sounds like in terms of the words they use and body language they display.
Are hot financing rounds at seed predictive of long term company success?
Seed-stage FOMO is like jet fuel—it can blast valuations sky-high. But does heat at seed predict long-term altitude? In other words, how strongly does deal heat at seed correlate with long term eventual outcomes? I’m not aware of any real data that’s definitive on this question.
Throughout history there have been many mega venture outcomes where the seed round was strikingly uncompetitive (Coinbase, Airbnb, Fitbit, etc.). There have also been cases where the opposite is true: Rippling was competitive at seed, and indeed Rippling has gone on to be very successful.
In our own portfolio, several of our winners, such as Peregrine, took several years to hit escape velocity and raised somewhat under-the-radar early financing rounds.
The distorting dynamic right now is that multi-stage firms are rather price insensitive at seed. They make their money in later rounds and just want optionality. They’ll casually create deal heat in excess of the deal’s merits.
A hot seed round that’s fought over by seed specialists is perhaps the best predictor of quality.
Do serial founders deliver better returns than first time founders?
Even if repeat founders deliver larger outcomes, they usually command high valuations in their early rounds.
For example, suppose a repeat founder will raise at 3x the entry price at seed relative to a first time founder. Are repeat founders delivering outcomes usually 3x as large? Is paying up for a repeat founder worth it? I’m genuinely curious about this one.
I’m not aware of definitive data on the question. In the Village experience, we’ve backed some repeat founders who raised pricey early rounds (e.g. Qasar Younis at Applied Intuition or Kabir Shahani at Adora) and we haven’t been disappointed yet!
VCs lack rigor when analyzing founder quality despite its central role in early stage investing
One investor at a top firm told me, “The most overused word in our partnership is the word ‘special.’ We keep calling certain founders special and no one really knows what that means.”
You can sound smarter when analyzing market size and product dynamics. You can be quantitative. It’s hard to be precise in the same way when talking about humans. When praising founder quality, platitudes reign.
Thus, one of the most important factors in early stage investing – talent evaluation – is often assessed and discussed at venture firms with a total lack of rigor.
At Village, we’re developing a fairly detailed scorecard for assessing founder attributes and we’re developing benchmarking data to more crisply talk about new prospective founders in relative terms (i.e. to compare a new founder pitching us to a successful founder in the portfolio who we all know).
In an AI age where product moats are hard to conceptualize, founder quality rises to an ever more important consideration. It deserves far more rigor inside investment firms.
Investors like to emphasize “taste” and mystique in their investment evaluation process – it’s higher status and makes them harder to emulate
There’s an incentive for investors to make what they do seem mysterious.
When talking about why they backed a certain company: “You know it when you see it” or “It’s all about taste” or “I just had a feeling that this founder was special.”
The more mysterious, the better. LPs like to back singular talents. A black box of intuition can feel singular.
Something that can be deconstructed or reverse engineered feels less proprietary, and more copy-able. So you won’t often hear a GP frame their expertise in maximally accessible way.
“Hell yes” conviction versus “I guess so” conviction
“If it’s not hell yes, it’s hell no.”
“If there’s any doubt, there is no doubt.”
These catchphrases center extreme conviction as the bar for world class decision making.
But in investing, oftentimes we allow for a wider range of conviction.
My question: In early stage venture capital, is being at 9 out of 10 on the conviction scale at the time you make the investment decision a stronger signal than being at 7 out of 10 conviction? Suppose the deal gets done either way because it clears the minimum threshold. Do the 9 out of 10 deals end up being more successful than the 7 out of 10 ones?
Firms take different positions on this question. Sometimes you see conviction reflected in check size – the more conviction the investor has, the larger their check. Other times, it’s binary: We’re either doing an investment or we’re not, and if we are, there’s a standard check size/ownership target we pursue.
In super early stage investing, there’s tremendous uncertainty. Among “credible” venture deals – which is indeed a narrow subset of all deals that get done – I believe it’s hard to predict which companies will be the decacorns versus unicorns. So a standard check size makes sense.
There’s an incentive for an investor to say they always knew their giant winner was going to be the eventual giant winner. Stripe or Coinbase or Airbnb at seed – yes, looking back, those were definitely the ones they had 10/10 conviction on. Sure. Of course. Never a doubt.
Sometimes you can find more honesty from decision makers in other fields. One of the more consequential decisions in U.S. military history was the decision to attack Osama bin Laden’s compound in Pakistan. Barack Obama described the decision to go in as a 55% yes, to 45% no, decision. Barely-over-the-threshold, in other words, of conviction.
How would the world be different had Obama followed “if it’s not hell yes, it’s hell no”?
When to back great founders with a weak initial business idea? The thorniest of questions for seed stage investors
We frequently meet talented founders with business ideas that don’t make sense (to us!). It can be tempting to back incredible founder talent and hope they figure it out and pivot their way to a better idea. After all, the tech industry is ripe with examples of successful pivots—think PayPal, Slack, and so many others.
At the same time, pivots don’t work as often as you might think. The popularity of the concept of the pivot in startup lore exceeds the rate of success in practice. We’ve backed several startups with weak initial ideas and strong founders. And frequently, the strong founders were just not able to overcome depleted emotional and financial reserves to pivot their way to a better idea when they encountered headwinds.
Across the Village Global portfolio, I’ve been surprised at how important the initial idea has been for long term success. The founding insights and theses of companies like Addi, Multiverse, Applied Intuition, Enveda, Grow Therapy, Peregrine, and other winning companies continue to ring true today.
So, hearing a pitch from an exceptional founder working on what we judge to be a weak idea presents one of the thorniest investment dilemmas for seed stage investors like ourselves. In these cases, I’ll consider four things:
- The founder’s passion/intensity towards the initial idea. Do they seem rational about their v1 idea and open to changing it in the face of market feedback?
- Price. Many reasons why we would perceive an idea to be “bad” have to do with ultimate TAM/terminal value, so a lower entry price helps mitigate this risk.
- Round size – smaller is better. This can be counterintuitive. Some investors want larger seed rounds to give the founder the opportunity to work through the initial ideas and iterate to something that’s viable. The problem with raising a large seed round on a bad initial idea is that it can lead the founder to hire too many people out of the gate. The more FTEs you have, the harder it is to pivot—because you have to deal with the emotions of all your team members, and ultimately get buy-in. Typical employees are not accustomed to the entrepreneurial roller coaster and can thrash amidst a major pivot.
- Solo founder vs. multiple founders. A solo founder working on a problematic idea is actually more attractive because they will be more able to dilute themselves if need be (e.g. raise additional capital at tough terms). Large co-founding teams where each principal has a lesser share have a harder time pivoting. The extra dilution such a process entails is more painful when your slice of the pie was smaller to begin with.
What does it mean to leverage a network to make better investment decisions?
All investors ping friends and experts to get hot takes on deals they’re looking at. There’s nothing novel about that.
But to be “network-driven” in its truest form you want to leverage the insight of a network in the entire venture process of sourcing, picking, winning, and supporting companies.
Let’s consider picking: How can you use your network to be better at discerning deal quality?
First, not all hot takes are the same. Biases abound. Undisclosed agendas or axes to grind are common. At Village, we like to think we can obtain trusted, truthful insight from experts who have reason to be especially truthful with us thanks to a unique blend of social and economic incentives that frame the relationship.
When someone is engaged with you in a multi-shot, long term, economic and socially consequential way, the result is less adverse selection, more truth — faster.
Otherwise, when you ping an expert who otherwise has no connectivity to you, there are many landmines that distort their perspective. Structural, proprietary relationships beat one-off transactional pings.
Second, some parts of a DD process benefit more from network intelligence than other parts. Suppose you’re evaluating a startup’s product, market, and team. On product & market, experts can be especially useful. On the team question, experts in your network are useful only if they’ve personally worked with the founder in question. Otherwise, it’s hard for folks who aren’t building companies or investing in companies to properly calibrate founder quality. For example, if you’re talking to an expert in the market and asking her about whether the CEO’s background is a good fit to build a successful company, the network intel may be misleading rather than helpful.
Given this, at Village, we tend to pursue founder evaluations in-house, and lean on our network for product & market insight.
Third, there needs to be an orchestration layer that sits on top of the decentralized hivemind. The orchestration here refers to how weigh the information you’re hearing from your network, how you feed it into scorecards and memos, and how you ultimately arrive at conviction on whether to do the deal. The “meta” process is important to stay intellectually rigorous.
Network-driven venture, in the way you get leverage from others, enables you to exercise rigorous investment judgment at a somewhat higher volume than a typical early stage fund.
Venture Firm Structures, Strategies, and Portfolio Construction
If you just want to invest, don’t start your own firm
A friend of mine was a GP at a large multi-stage firm for seven years. In that time, he estimates he spent all of 15 minutes thinking about LPs. When you join a scaled-up platform you’re handed capital, an office, infrastructure, and you go start meeting founders. You don’t have to worry about anything else. Just invest, baby!
Well, you do have to confront the fact that you have less control, day to day agency, and equity ownership. But this tradeoff is worth it to many. It’s why venture jobs are highly sought after and are, on balance, a pretty sweet gig.
When you start a new firm, you end up spending a lot of time on non-investing, non-glamorous activities. Entrepreneurship always requires a deep love for the grind. We’ve easily spent more than a million dollars on lawyers. I’ve spent more time talking to lawyers these past several years than I ever thought possible.
Investors who decide to start their own firms sometimes make the common career mistake of accepting a promotion. A “promotion” can bring status and comp and responsibility–but it can also lead to a day-to-day that has little to do with the job you previously excelled at and enjoyed.
Portfolio construction is key but beware of theology. There are many ways to make money
Some people in the venture ecosystem have theology that there’s one type of portfolio construction that’s best.
My view is there are many approaches that work. Different sorts of sourcing strategies; different value-add structures post-investment; different portfolio constructions and ownership targets.
At Village, for example, we run a broader portfolio than many because we believe in maximizing the odds of getting into outliers even if we own a little less of each company. We don’t take board seats; other firms do. We focus on early stage; other firms invest across stages. We believe in networks and community; other firms love artisanal GP-to-founder mentorship.
In the end, GP-market-fit matters most: Do the assets and aspirations of the GP match the strategy and market opportunity they’re pursuing?
As a firm’s ownership target increases, they need to be able to win zero sum versus non zero sum games
When firms see success, they usually raise larger subsequent funds and target higher ownership levels in the startups they invest in (to reflect the larger fund sizes).
The larger your ownership target, the less collaborative you can be with other investors. Which means you’re playing more zero-sum games to win allocation. Which requires a value prop to founders that makes them pick you over another investor.
Craig Thomas at UTIMCO once produced a great chart about this which points to the importance of a firm’s AUM not outstripping their brand strength in market:
In our view, if you’re targeting over 10% ownership at seed, you’re in zero-sum category. At 10% or less, you can co-invest and collaborate with other ecosystem players, and it’s less important for your value prop to be decisively better than other firms.
LPs should always be asking GPs who are scaling fund size: Are you playing zero sum or non-zero sum games when bidding on startups other investors also want to invest in?
Investment rules might seem arbitrary—but they prevent decision fatigue from frying your brain
If you’re making dozens of investment decisions a year (as we do), decision efficiency is key. You need rules to simplify things and move quickly, even if the rule can seem arbitrary. If every decision point requires a bespoke process to arrive at an answer, every day is exhausting.
For example, suppose you have a rule that your minimum ownership in a company is 7%. And you have the opportunity to buy 5% ownership in a given deal. It’s not that much of a difference, of course. It won’t matter if the business has a ginormous outcome. It can be tempting to just settle for 5%. (And sometimes you should.)
But generally, the reason to articulate the 7% minimum and stick with it, is that it’s simplifying. The company isn’t selling at least 7% of their company? Move on. Next play.
Entry price matters. And entry price doesn’t matter. The never ending debate
Every few months there’s a debate on VC Twitter about whether entry price matters. “All that matters is getting into the best companies,” someone will say. It doesn’t matter if you invested in Stripe at $10M or $50M postmoney—the key is that you were in Stripe. True.
But most companies aren’t Stripe. And it’s never obvious when the $50M postmoney seed deal you’re evaluating is the company that will exit for $50 billion or…$100 million. And there are plenty of investors whose winners are PagerDuty-like outcomes, not Stripe, and they still make a ton of money.
Given the uncertainty about the size of outcomes, I believe that, taking into account multiple fund vintages over a 10+ year period, discipline on entry price will improve your average returns – as it will allow you to make money investing in companies that have PagerDuty-like outcomes or Stripe-like outcomes. It will allow you to make money whether your companies exit in bull or bear markets.
Of course, even when disciplined, you’ll make exceptions on price.Venture is a business of exceptions. I’ve found it helpful to track the number of exceptions you make and commit to staying under some threshold (20%?) so you can know whether a given out-of-range bet is actually an exception — or whether it’s the rule.
There are only two ways to do deals at attractive prices with no adverse selection
First, you can be first. You can find the founders first. This is mostly our strategy at Village Global. Find the founder first, invest before other investors — before there’s an auction. At Village Global, our median entry price over the years has been around $10M postmoney. When you’re amazing at discovery – i.e. when you find founders at the inception of their journey – you can invest at low prices without adverse selection in founder quality. Discovery usually requires a network moat.
Or, you can be contrarian. You can believe in founders who other investors won’t touch. Diamonds in the rough. No auction, lower prices. Simple.
Central casting deals that have hordes of VCs already circling? Those deals are pricey. To invest in these companies, you have to be amazing at access — at winning zero sum games. Access investing usually requires a brand moat.
Multi-stage venture firms today tend to leverage their brand moat to practice access investing — at high prices.
Breakout, smashing success at the beginning can cause venture franchises to over-scale
Is there a level of early success in a firm that’s the optimal foundation for long term sustained success? Can too much success too early lead to premature scaling?
In venture capital, firms that enjoy too much explosive success in their Fund 1 tend to be given a very long rope from LPs who automatically re-up for several subsequent funds. With a long rope, GPs can hang themselves by over scaling.
Size tends to be the enemy of greatness in fund returns. I know of GPs who hit it out of the park with a $10M Fund I. Fund 2 is $200M, Fund 3 $300M, and within a decade their AUM is over a billion. The later fund returns never approached the high water mark of Fund I.
Now, of course given a binary choice, you’d rather your first fund be successful than not successful, and early success does produce advantages that compound. You can attract better talent, for example. You spend less time fundraising from LPs and thus have more time to focus on investing. And so on. So, there’s an “optimal” amount of early success that’s well north of merely average for positioning you for great long term success. But optimal is probably less than “maximum.”
In short, a Fund 1 that returns 4x might be better for long term franchise returns than the Fund 1 that’s a 7x.
Specialization can make sense but you have to pick “what” and “when” correctly—and not be blind to the intersections
LPs like specialist emerging managers because it’s easier to grok how that emerging manager might compete against the big venture brands: by winning deals in their area of hyperfocus.
But specialist funds have their own risks. There were plenty of specialist investors focused on VR 8 years ago or crypto during the 2022 bust cycle. Specialists need to pick the right category and the right timing for focusing on that strategy.
What’s more, the lines are blurring between categories. In the past, consumer vs. enterprise were distinct practices inside venture firms, but today the consumerization of the enterprise and the totalizing impact of AI is softening those bright lines.
To be a true specialist today is to potentially miss the opportunities that sit at the intersection of different fields, technology implementations, and VC categorizations.
At Village, to get the best of both, we like running generalist funds with a sourcing and decision making approach that involves teaming with specialist angels and allied GPs.
How much to support struggling companies versus your winners?
Fred Wilson once wrote you make money on your winners and you make your reputation on your losers. With due respect to Fred (one of the GOATs), that doesn’t resonate with me.
Reputation rides winners, too. Losers rarely get loud microphones; winners become iconic.
The challenge for VCs allocating time/attention to their existing portfolio is that for the first few years of a company’s life it’s hard to know if it’s a winner. A lot can change. Today’s laggard seed company might figure it out. Roblox petered away for years before erupting into greatness. Today’s seeming winner at Series A can flame out at Series C.
What’s definitely true is that, in the meantime, the companies struggling right now tend to ask for the most help.
Because you don’t know who’s going to break out, in a young venture portfolio, it’s dangerous to over-invest resources in any one company. One must strike a balance between helping today’s seeming winners and today’s seeming losers.
Sourcing matters most at early stage. No diligence wizardry saves bad deal flow—garbage in, garbage out
You can become world-class at analysis, at diligence, at winning, at supporting. But if you’re not seeing the best stuff at the top of the funnel, it’s all for naught.
Sourcing matters most in seed stage venture because the attractively priced deals are not in plain sight; they must be discovered. Becoming “systematic” at sourcing is harder than becoming “rigorous” at diligence.
And this truth is overlooked because investors at later stages in venture, and certainly other asset classes, tend to rightfully focus on diligence more than sourcing. Early stage VC is unique within venture overall, and venture is unique within broader finance.
Even if you get its importance, it’s a hard edge to sustain. Sourcing networks atrophy. Sourcing nodes literally age out of relevance in youthful tech networks.
Why are venture firms generally so poorly run? How do partnerships/committees work?
Venture firms tend to be poorly run because venture attracts people who dislike operating—or were bad at it in their past lives. It’s why many ended up joining the dark side to begin with.
Most venture firms ignore their own advice, my friend Auren Hoffman has pointed out, structuring themselves in ways they’d never back as investments. They run by committee instead of having a CEO, lack scalable business models, and fail to leverage technology. It’s like doctors smoking cigarettes.
A committee structure of 2+ people jointly making decisions—the word “partnership” is euphemistic, these are committees!—is the most damning explanation for poorly run firms. Why on earth don’t more firms have a singular CEO?
The reason has to do with the superstar talent model of VC, where top GP talent—oftentimes proven entrepreneurs or product/engineer operators—are in high demand. To lure ex-entrepreneurs used to calling the shots, firms promise autonomy—leaving no one clearly in charge.
Put these masters of the universe together and ask them to agree on something—then grab your popcorn.
A specific side effect of committee management is that, over time, the official committee/partnership org chart rarely reflects how decisions actually get made inside the firm.
In venture firms, shadow power structures form around blockbuster deals and track record, big LP relationships, or buzzy personal brand building on Twitter and elsewhere—creating fault lines invisible on paper until they eventually fracture the team.
The average VC is more interesting than the average entrepreneur. The most exceptional entrepreneurs are more interesting than the most exceptional VCs
GPs of venture firms tend to be compelling intellects with impressive operating or founding experience. And they by definition run a portfolio and thus tend to have a broad perspective on different technologies shaping our future. A room of 100 GPs is a pretty interesting room.
A room of 100 entrepreneurs will be uneven in terms of average quality, by contrast.
But the most exceptional entrepreneurs are more inspiring and interesting than the most exceptional VCs. The ones actually bending the world to their will — they possess an “it” factor that’s unmatched.
To be able to spend time with these entrepreneurs and play a small role in their success is the privilege of a lifetime.
Thanks to Anne Dwane, Amrit Rao, Jacob Mullins, Sam Kirschner, and Liz Factor for offering useful feedback on a draft of this essay.